Application of Standardized Model of Financial Solvency Assessment of Local Governments

Abstract: Local governments in the Republic of Srpska/Bosnia and Herzegovina have used the opportunity to finance themselves by issuing bonds on the domestic capital market. Potential investors, especially institutional ones, had no independent, professional and comparable assessment of the solvency of local governments available when making investment decisions in domestic municipal bonds, as they were not audited by international rating agencies. The paper tests the hypothesis: the standardized model for assessing the solvency of local governments allows them easier access to additional sources of capital and encourages potential investors to invest in municipal bonds. Following the analysis, a standardized interactive model is developed to provide a comparative assessment of the financial solvency of local governments, individually and by development group. The research results show that standardized comparative analysis of local government financial solvency is positively correlated with the level of investor exposure to municipal bonds. On the one hand, the model based on specific financial indicators provides investors with all the necessary information when deciding to invest in municipal bonds, and on the other hand, it provides local governments with all the advantages of financing through the issuance of bonds in the capital market.

Key words: financial solvency, credit rating, financial indicators, municipal bonds, local governments, investments

JEL codes: G11, G23, G24